Question

1.UC Cars operates a fleet of cars for hire in Singapore. In planning its operations for February, UC Cars estimated that it would carry fare-paying passengers for 40,000 km at an average price of $2.00 per km. Past experience suggested that the total mileage (km run) should amount to 250% of the fare-paid km. At the beginning of October, UC Cars employed ten drivers and decided that this number would be adequate for the month ahead.
The following cost estimates were available:

Employment costs of a driver	$ 2,000 per month
Fuel costs	$ 0.16 per km run
Variable overhead costs	$ 0.10 per km run
Fixed overhead costs	$ 18,000 per month

In February, revenue of $ 72,200 was generated by carrying fare paying passengers for 38,000 km. The total actual km run was 105,000 km. Other costs incurred for the month were:

Employment costs of drivers	$ 19,200
Fuel costs	$ 17,640
Variable overhead costs	$ 10,080
Fixed overhead costs	$ 18,600

Savings from the employment cost of drivers was due to one driver leaving during the month; she was not replaced until early March.

Required:
(a) Prepare a columnar income statement showing the actual income, static budget income and flexible budget income for October. Indicate on your income statement the total operating income variance.

(b) Using a flexible budgeting approach, construct a set of detailed variances to explain the total operating income variance as effectively as possible. Present your variance analysis in a report to the owner of UC Cars. Include in your report suggested reasons for the variances.

(c) Suggest any further variances that could be computed to explain the operating performance of UC Cars. Outline the additional information that your suggested variances could provide to the owner of UC Cars.

Answer 1

(a)	Income Statement
	Particulars	Actual income	Static Income	Flexible income
	Income	72200	80000	76000
	Less: employmenyt cost	19200	20000	20000
	Fuel cost	17640	16000	15200
	variable cost	10080	10000	9500
	fixed oh cost	18600	18000	18000
	Net income	6680	16000	13300
	variance = 6680-13300
	=6620 unfavorable
(b)	Variance
	Particulars
	Income as per flexible budget	13300
	Selling price variance (2.0-1.9)*38000	-3800
	Employment less use in actual	800
	Fuel price variance (0.16-0.168)*105000	-840
	Fuel qty variance (95000-105000)*.16	-1600
	Fixed oh variance	-600
	Variable cost price variance (0.1-0.096)*105000	420
	Variable qty variance (95000-105000)1	-1000
	profit actual	6680